Russia continues GDP plunge

On today’s report, Russia has once again seen a huge drop in its economic output with GDP for the quarter shrinking 10.9%, versus last quarter’s 9.8% and expectations of 10.2%. As an economy heavily reliant on energy, particularly oil and natural gas, the plunge in oil prices from its peak in summer of ’08 pushed the country into its deepest recession in 10 years, when it grew at an average rate of almost 7%. This bad news was met with weakened ruble which fell for a fifth straight day against the dollar.

From Bloomberg:

Russia “crumbled” after commodity prices collapsed, Medvedev said. Energy, including oil and natural gas, accounted for 68.8 percent of exports to the Baltic states and countries outside the former Soviet Union in the first six months of the year, Russia’s Federal Customs Service said last week.

Urals crude oil, Russia’s chief export earner, averaged $61.03 a barrel during the last quarter after reaching a record $142.5 in July 2008.

Russia failed to free itself of its reliance on commodities during Prime Minister Vladimir Putin’s tenure as President between 2000 and 2008, said Natalia Orlova, chief economist at Alfa Bank, Russia’s biggest privately-owned lender.

“Because of high oil prices, capital came in; banks transferred this capital into the economy,” she said. “Rising wages fed consumer growth, so there was no reason to invest or create new production. Now capital has stopped coming in and consumption has stopped. This model has ceased to exist. We don’t have a new one.”

Russia “crumbled” after commodity prices collapsed, Medvedev said. Energy, including oil and natural gas, accounted for 68.8 percent of exports to the Baltic states and countries outside the former Soviet Union in the first six months of the year, Russia’s Federal Customs Service said last week.

Urals crude oil, Russia’s chief export earner, averaged $61.03 a barrel during the last quarter after reaching a record $142.5 in July 2008.

Russia failed to free itself of its reliance on commodities during Prime Minister Vladimir Putin’s tenure as President between 2000 and 2008, said Natalia Orlova, chief economist at Alfa Bank, Russia’s biggest privately-owned lender.

“Because of high oil prices, capital came in; banks transferred this capital into the economy,” she said. “Rising wages fed consumer growth, so there was no reason to invest or create new production. Now capital has stopped coming in and consumption has stopped. This model has ceased to exist. We don’t have a new one.”

Assuming its continuous reliance on these energy resources, analysts are estimating crude oil price that doesn’t go above $70 to $75 a barrel, let alone 100. If that’s the case, it should be expected then for Russia to take a longer time to grow or be back where it was prior to the crisis. Finance minister Alexei Kudrin said the economy might need between 4 and 5 years to match last year’s growth of 5.6% which was still much lower than the previous year.

If Russia does not diversify its sources of economic growth, it might remain a predictable and highly volatile market to follow. This should be interesting.